Additional Application
SUBSIDIZED MEDICAL CARE IN CÔTE D'IVOIRE AND PERU $\text {percentage change in quantity demanded \(= 10 \% \times 0.47 = 4.7 \%\)}$

question 207

Multiple Choice

Additional Application
SUBSIDIZED MEDICAL CARE IN CÔTE D'IVOIRE AND PERU
If the price of medical care increases, how will consumers respond? The rising cost of medical care has forced many nations to take a closer look at programs that subsidize medical care for their citizens. If prices are increased to cover more of the costs of providing medical care, how will this affect poor and wealthy households? Many developing nations subsidize medical care, charging consumers a small fraction of the cost of providing the services. If a nation were to cut its subsidies and thus increase the price of medical care for consumers, how would the higher price affect its poor and wealthy households?
In Côte d'Ivoire in Africa, the price elasticity of demand for hospital services is 0.47 for poor households and
0.29 for wealthy households. This means that a 10 -percent increase in the price of hospital services would cause poor households to cut back their hospital care by 4.7 percent:
$\text {percentage change in quantity demanded \(= 10 \% \times 0.47 = 4.7 \%\) }$
$\text {In contrast, wealthy houscholds would cut back by only \(2.9\) percent: }$
$\text {percentage change in quantity demanded \(= 10 \% \times 0.29 = 2.9 \%\) }$ In Peru, the differences between poor and wealthy households are even larger: The price elasticity is 0.67 for poor households but only 0.03 for wealthy households. The same pattern occurs in the demand for the medical services provided in outpatient clinics. The poor are much more sensitive to price, so when prices increase, they experience much larger reductions in medical care.
-Recall the Application on ʺSubsidized Medical Care in Côte DʹIvorie and Peru.ʺ If in Côte DʹIvorie poor households have a price elasticity of demand for medical care of .50 and rich households have a price elasticity of demand for medical care of .25, then a price increase of 10% would lead to the poor households reducing their quantity demanded for medical care by:

• A)2.5%.
• B)5%.
• C)25%.
• D)50%.

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